A recent late summer morning at one of the company’s three separate buildings in Irvine, Calif., roughly 100 Auction.com employees buzzed around a vast, open windowless room lined with rows of cubicles and slung with venting and lighting hung from the ceiling high above.
Along one side of the room, which employees refer to as the War Room, wide-screen televisions were aglow with what was essentially the objective of the day’s operation: the sale, by online auction, of roughly 300 residential assets located throughout Southeast Florida.
Current bids displayed on screens, along with property overviews, and timers ticking down the minutes and seconds remaining in the sale.
Auction.com, which bills itself as the “nation’s leading online real estate marketplace,” has sold more than $26 billion in real estate this way—100,000-plus properties—since its first auction was held in 2007. And the company has ambitious growth plans that could, if all goes smoothly, revolutionize not only how real estate is sold, but also the role of many who currently draw commissions on sales, such as lawyers and brokers.
Those plans involve a delicate adjustment in course and the successful execution of several initiatives. With the choppy waters of the United States distressed commercial and residential markets smoothing out, several company executives told Mortgage Observer that future growth hinges on achieving the trifecta of selling nondistressed real estate in nondistressed markets for nondistressed sellers.
The company is also in the midst of a push into Europe. Its second successful German auction sold 31 properties for nine institutional sellers this past June. The assets were a mix of office, supermarket, retail and distribution centers and brought in more than 75 million euros. Its third European auction is slated for the first week in December.
And signs point to an initial public offering currently in the works that could provide additional capital for expansion.
“The key is to become an adjunct to the brokers, working with the brokers, becoming the default platform that everybody uses to help their clients sell real estate,” Rob Friedman, co-founder and chairman of the board, said. “Our ultimate goal is for this platform to streamline the real estate industry worldwide.”
Mr. Friedman and several other executives met with Mortgage Observer in Irvine to discuss the company’s current and future plans. As bullish as those plans are, though, the company does face some challenges, mainly convincing a market that has come to associate online auctions of real estate purely with distressed properties.
History
Auction.com today is a result of many influences, but chiefly those of Mr. Friedman and CEOJeffrey Frieden, who as high school friends operated stands selling consumer electronics at Orange County, Calif., swap meets and flea markets. After high school, in the early 1980s, the pair eventually opened a consumer electronics store, Stereo Connection, which grew to several locations.
Upon hearing of a guy who ran consumer electronics auctions for scratch-and-dent, returned merchandise and the like, Mr. Friedman said, the pair put together a consumer electronics auction of their own. The experience was eye-opening and prompted some realizations that have carried through to the business today. For instance, properly promoted auctions move merchandise, potentially a lot of it, while providing participants with a degree of transparency.
Mr. Friedman said that he “immediately fell in love with the auction system,” because it was a way to “mass produce sales—to really help people make decisions.”
While Messrs. Friedman and Frieden were having their auction “aha” moment, selling consumer electronics, hanging out with cowboys at the Western College of Auctioneering in Billings, Mont., (Rob) and running their co-owned Volkswagon dealership (Jeff), Auction.com’s vice chairman and co-founder, Monte Koch, was building a career on Wall Street, starting in the M&A group at Lehman Brothers in 1986.
After Lehman, Mr. Koch went to work for Jim Wolfensohn, who ran the private M&A advisory group James D. Wolfensohn. The shop was sold to Bankers Trust in 1995. He ultimately landed at Deutsche Bank as the firm’s global head of real estate investment banking thanks to the German bank’s acquisition of Bankers Trust in 1999.
“So I was on Wall Street for 25 years, but I only switched jobs once,” he said joking. “But I had 15 different business cards, because all of these entities kept merging and changing.”
Paths crossed around 2004, when Mr. Koch started providing strategic and advisory services to Messrs. Friedman and Frieden for a land sale business the pair was running. Though he would stay on at Deutsche Bank full-time and develop a pedigree and book of contacts that would prove beneficial for Auction.com, he also provided a key contact that jump-started the Auction.com predecessor, Real Estate Distribution Corporation.
During the financial crisis, a homebuilder friend contacted Mr. Koch. He needed to sell some assets, groups of homes. Mr. Koch thought of Messrs. Friedman and Frieden and approached Mr. Friedman, but was met with some hesitancy. At the time, Mr. Friedman said, his custom was to arrive at work in cutoff shorts at 10 a.m. and leave at 2 p.m. “It was great,” he remembered. Nonetheless, the pair agreed to meet with the homebuilder.
“We ultimately did the 54 houses for the guy,” Mr. Friedman said. “We took 54 homes, and we sold them all in one day at our very first auction—a $10 million auction our very first day. But that goes back to the fact that Jeff and I had a lot of experience with promotion.”
“I don’t think anybody had the idea in their mind that we were going to be making a 1,100-person company out of this,” Mr. Koch, who finally joined full-time in July 2012, said. “That’s what’s always neat about this story as I look back on it.”
Several years ago, before the commercial business, Mr. Koch introduced LNR Property co-CEOsToby Cobb and Justin Kennedy—former Deutsche Bank colleagues—to the platform. “Literally, they took a look at the platform, and in a snap they understood all the benefits, and they started to run a lot of assets through us,” Mr. Koch said. They liked it so much, in fact, that they decided that LNR Property, a special servicer, would invest in the commercial side of the business.
When Starwood Capital Group and Starwood Property Trust completed their $1.06 billion acquisition of LNR Property in April, the firms also acquired a small stake in Auction.com, a stake that Mr. Koch said was “in the single digits.”
What Messrs. Cobb and Kennedy saw, apart from an opportunity for LNR, a special servicer, to sell loans and distressed real estate on the platform and skip paying outside fees, was a fairly straightforward online auction process.
It starts roughly 60 days before any given auction takes place, with the seller executing a master marketing agreement, providing a list of assets to be put on the block, as well as providing necessary due diligence and ordering titles. In the days leading up to the 48-hour auction period, potential buyers gain access to that due diligence, which has been loaded, and submit bid deposits and other information to confirm financial standing.
The due diligence is a sticking point, though, for some. “The general feeling is that most active buyers in the marketplace aren’t going to the Internet to try to find deals, and the information that’s being represented in the process that unfolds in an online auction doesn’t allow the appropriate due diligence,” one top New York-based commercial broker, who spoke on the condition of anonymity, said. He added that the process of coming to a final price between buyer and seller is a very complex negotiation and that an online auction might cut out a portion of buyers who are perhaps older and more traditional and therefore unfamiliar with an online format.
Online auctions also struggle against the perception that the services they offer are strictly for distress. Raymond Villani, the managing director of Bid on the City, an online real estate auction site that launched in New York City in 2009, agreed that this was indeed the heart of the problem. “We wanted to change that perception,” he said. To fight it, the company went luxury only and scaled back.
The New York-based broker, for his part, pointed out that the Internet has been around for 20 years now. “This auction platform—or variations of it—has existed for a long time. It’s not something new to the market,” he said. “It hasn’t caught on yet, so why would it change now?”
But Auction.com executives said that it is catching on. And they cite some recent assignments as evidence of inroads made toward selling more nondistressed commercial real estate. Asked if he thought the company would really be able to transition to selling more nondistress and auction, say, a trophy property in a gateway city like New York, Mr. Koch said it already has.
“It’s happening,” he said. “And I’ll give you a few examples.” He named a building in Glendale, Calif., sold last summer for $73.6 million, with private equity firm Blackstone making the winning bid.
Another example involved Preston Trail Village, a Kroger-anchored shopping center at 17194 Preston Road in Dallas, Texas, that Mr. Koch said sold for $17.1 million—well above Retail Property of America Inc.’s reserve price of $15 million.
“Once we decided to do something with the asset, we talked to several brokers, had some conversations with individuals in the market about a direct sale and then ultimately had some ongoing conversations with Monte,” Shane Garrison, EVP, COO & CIO at RPAI, told Mortgage Observer. “We decided that this one made a lot of sense from an Auction.com standpoint because of the greater visibility the platform provides.”
This was RPAI’s first auction, and Mr. Garrison said that he was comfortable with Auction.com’s ability to move the property and to attract a deep pool of qualified buyers. “It certainly exceeded expectations,” he said. “It was a very fluid exercise behind the scenes.”
For its part, Blackstone circled back to Auction.com after buying the Glendale, Calif., building to use it to sell several of its La Quinta hotels this past summer. “These are big institutional names,” Mr. Koch said. “We’re selling assets for General Electric, we’re selling assets for Kimco—I can just keep pulling out the names.”
CEO Jeff Frieden agreed. “I think that most of the major financial institutions have either bid or are bidding on our platform, because we have a lot of supply,” he said.
Future Growth
Part of growing Auction.com has involved an infusion of human capital and aligning that human capital with some of its tech counterparts. Jake Seid, a co-president at the company who has oversight over its daily operations, has helped to facilitate this since he joined two years ago. Formerly a managing director at venture capital firm Lightspeed Venture Partners, Mr. Seid has recruited Chief Legal Officer Michael Callahan, a longtime general counsel at Yahoo, Chief Technology Officer Ravi Keswani and Chief Financial Officer Bruce Felt, who as chief financial officer of SuccessFactors helped to shepherd that company through its IPO in 2007.
“I think one of the things that you see in the venture world is patterns in what create large companies, and one of the things that creates the largest companies is a market making its first transition from off-line to online,” Mr. Seid said. “And that’s what’s happening in real estate right now.”
Mr. Felt’s hire, in particular, could confirm what several sources told Mortgage Observer and what several executives all but acknowledged—that the company is preparing for an IPO. Mr. Friedman said that it was under consideration and that “if the stars all aligned properly it’s a possibility.” Company CEO Jeff Frieden said that getting rid of a former co-CEO structure that had executives sharing that coveted title had been part of the prep work necessary prior to an IPO.
“It just seemed better to the market that there’s one CEO,” Mr. Frieden said. “And as we think about going public, that would be very unusual to have co-CEOs.”
From his perspective, Mr. Frieden said that, as far as future growth is concerned, there are three key objectives. “One will be our European and worldwide expansion. Auction.com will be a worldwide platform,” he said. “The second area of growth for us would be having a bigger share of the post-crisis residential real estate market.” The third area he cited was “getting more natural holders of real estate,” such as REITs and insurance companies, “and really assisting them with selling their real estate in a platform that has wide distribution.”
